Morningstar | Mixed 1Q Update for CLP; FVE Lowered to HKD 82
CLP Holding provided a mixed first quarter update with a steady Hong Kong operation offset by continued weakness in Australia. Our fair value is lowered to HKD 82 from HKD 86 and CLP remains slightly overvalued. We continue to see the narrow moat rated company as high quality, given strong cash flow generation from its Hong Kong operation. The defensive nature of its cash flow is a key attribute for investors amid rising volatility in the equity market. As such, we do not expect share price to converge towards our fair value in the near term. The Hong Kong operation is performing well with electricity sales increasing 1.8% against the same period last year. Initiatives in the construction of a combined cycle gas turbine generating unit, projects in offshore LNG terminal and landfill gas power plant are proceeding as planned. Mainland China’s performance was steady with stronger performance for its renewable offsetting its non-thermal portfolio. Yangjiang Nuclear Power Station saw higher volume while Daya Bay Nuclear Power Station’s operation was stable. Hydro was also steady while wind was slightly weaker.The clear negative was EnergyAustralia with competition on the retail front persisting. Customer numbers continue to decline while margins are pressured as the company is looking to retain customers. With the Australian government implementing a default market offer for electricity tariffs from 1 July 2019. The default market offer is set by the regulator and is below standing offers for residential and small business customers. Those customers who have not switched retailers are usually on standing offers. While Energy Origin has not quantified the impact, larger peer Origin Energy noted a decline of AUD 44 million in pre-tax profit. Management noted that its earnings impact will likely be lower given EnergyAustralia’s smaller operation and less than 10% of its customers are on standing offers. Further, more of its customers are on market offer given EnergyAustralia’s inner city geographies in New South Wales and Victoria are already competitive. On the generation side, electricity output was lower than the same period last year on higher outages and coal availability for its Mount Piper Power Station.
CLP Holdings is an investment holding company. Through its subsidiaries, Co. operates five geographical regions, Hong Kong, Mainland China, India, Southeast Asia and Taiwan, and Australia. In Hong Kong, Co. generates, distributes and provides electricity supply. In china, Co. produces power with a focus on clean and low-carbon energy, including nuclear and renewables. In India, Co. has a diversified generation portfolio comprising coal, gas and renewable energy. In Southeast Asia and Taiwan, Co. has interests in Taiwan's Ho-Ping Power Station and Lopburi solar project in Thailand. In Australia, Co.'s asset portfolio includes coal, gas and wind generation and gas storage facilities.
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